That’s a significant question looked at by Dan Gross in the Sunday NY Times. Its an issue that has significant ramifications for the economy, interest rates, and the ongoing social security debate.

Gross references Bear Stearns Economist David Malpass:

"Some say that a flaw may exist not in our national character but in the way the government calculates savings: because the bureau’s method of tallying income and consumption doesn’t take into account structural changes in the finances of Americans, it may systematically understate income and overstate consumption.

For example, income includes wages and salaries, interest on bonds, and stock dividends. But it doesn’t include capital gains on stocks, profits from selling a house, or withdrawals from 401(k) plans. Nearly 70 percent of families own homes, nearly half of all households own stocks and mutual funds, and an increasing number of baby boomers are turning to 401(k)’s for income. Those trends, some say, can make a big difference. "The structure of the household portfolio has changed over time," said David Malpass, chief economist at Bear Stearns.

Convinced that Americans aren’t frittering away all their income, Mr. Malpass plumbed the Federal Reserve’s Flow of Funds data, a trove of information on Americans’ spending and saving habits. In 2004, he found that the net worth of all households – their assets minus their liabilities – stood at $48.525 trillion, up 9.6 percent from 2003. Sure, rising home prices helped. "But even if you take out houses completely, it still shows huge savings," he said.

The problem with Malpass’ analysis is that he is taking a mathematical approach to what is essentially a behavioral issue. (Hey, it happens) Call it a rationalization. We tend to see those from both the Bullish and Bullish contingencies, as way to feel comfortable with those ideologies.

Let’s state this another way: As a nation, are we spenders or savers?

It raises a host of issues, some net positive, others more troubling. How does our behavior as consumer impact economic downturns? (It seems to smooth them out, at least recently). Why haven’t Businesses been as spendthrift as Consumers this recovery? (My theory is execs are afraid to see their options go underwater again). And the $64,000 question, how might this low savings rate impact retirees when the Baby Boom generation starts playing shuffleboard?

I believe we are not savers. The fact that so many pension plans, 401ks and IRAs go unfunded is a big clue as to that. (It also reveals how Tax ignorant all too many people are).

But stop for a moment to contemplate this: That people would rather spend their money consuming, rather than put it into a 401K where their employer does dollar-for-dollar matching is proof positive of our savings mindset.

That’s right, as opposed to GETTING FREE MONEY, many Americans still prefer to shop — rather than save.

I’m curious today iof Malpass is correct. So here’s a suggestion for what would be a signifcant and useful analysis: Use Malpass’ methodology for calculating the national savings rate — and then apply it to as many countries we can get data for. I’d like to see a list that includes at least: the U.S., Japan, Great Britain, Norway, Sweden, France, South Korea, Italy, Germany, Australia, Canada, Spain, Israel and South Africa. That’s a short list, but we want it as extensive and complete as possible.

The goal is to determine whether or not, as judged against a planet of our peers, we Americans are — relatively speaking — savers or spenders.

Should be a rather interesting discussion . . .

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UPDATE May 22, 2005 4:20pmThere’s a long but fascinating discussion on related topics at Whiskey and Gunpowder. You can see excerpts and related graphics below.

"In private, most of the fund managers and investment advisers I talk with express the view that the current imbalances in the global economy — and, in particular, the external imbalances of the United States — are not sustainable forever.

With the exception of the incorrigible optimists, most financial observers know that at some point, the excessive credit creation in the United States will backfire and lead to some sort of a crisis. But that is where our knowledge stops. We don’t know what might be the catalyst for the crisis, when it might happen, or in what form it might manifest itself.

Moreover, as I have just indicated, there are some unconcerned observers who believe that all is well in Dr. Greenspan’s wonderland. In a recent Wall Street Journal article entitled “Running on Empty?” (March 29, 2005), David Malpass, Bear Stearns’ chief economist, makes the case, “The reality is that the United States has the world’s biggest accumulation of savings and investments.”

Malpass continues: “The U.S. household sector, the world’s largest net creditor, is favorably positioned for higher rates due to large liquid assets and the generally fixed-rate U.S. mortgage structure…

“Not only are we not running out of household savings, it is growing fast both in terms of the annual additions and the cumulative build-up of American owned savings. Household net worth, one good measure of savings, reached $48.5 trillion in 2004. Time deposits and savings accounts alone total a staggering $4.3 trillion, versus slow-growing credit card debt of $800 billion. True, the United States is the world’s biggest debtor, but it is building assets faster than debt…"

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

7 Responses to “What’s the U.S. Savings Rate Really?”

Isn’t the whole issue of trying to claim assets are savings confusing the basic issue of flows versus stocks? Your stock of assets can change for two reaons: one, you divert some of your income to it (saving); or, two, the price changes. But the price change has nothing to do with the flow and when we are talking about savings rates we are talking about flows.

Actually, there is a good body of evidence that a primary reason for low savings is the big increase in assets.

My hubby and I lived below our means for years, saving and investing so that we could retire early. He was very conservative in the investing part, and we neither one had big time jobs… but we managed to accumulate a net worth of one million.

In looking around at people we know and family members, our habits are very unusual. At the best people use their 401K’s at work. At the worst, they are in debt up to their eyeballs and keep on using their credit cards.

The appreciation of your house is not “savings”. And you certainly cannot use it for paying your bills when you are retired.

I really don’t like to single out any one firm or strategist for excessive crtiticism — hey, we’re all wrong on quite a regular basis. But, goddamn, if Bear Stearn’s David Malpass hasn’t been on the wrong side of more than a few major issues facing th…

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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